Not all payments made by Company on behalf of the promoter shareholder to be treated as 'deemed dividend' under Income Tax Act

 The Ahmedabad Bench of ITAT has ruled that a payment made by a closely-held company on behalf of a shareholder, by debiting his existing credit balance in a deposit account maintained with the company, does not constitute “deemed dividend”, as no money flowed from the company to the shareholder.

 

The Assessee, an individual and Managing Director, shareholder of 57% in M/s Crystal Quinone Pvt. Ltd., maintained a deposit account with the company having a credit balance. On his instructions, the company made payments aggregating towards a donation, debiting the same from his deposit account. The Assessing Officer treated this payment as deemed dividend under section 2(22)(e), to the assessee's income on the ground that the company made a payment for the individual benefit of the shareholder, who in turn claimed deduction under section 80GGC (deduction on donations to political parties) in his personal tax return. The CIT(A) upheld the addition, observing that the benefit of the payment accrued entirely to the assessee and that the transaction was an afterthought to shift the deduction from the company's return to the individual's return.

 

Upon appeal before the ITAT, the Bench examined the text of section 2(22)(e) and noted that the provision covers only payments by way of advance or loan to a shareholder, or payments made on behalf of or for the individual benefit of a shareholder, to the extent the company possesses accumulated profits. The Tribunal observed that since the company merely debited the assessee's pre-existing credit balance and no money was given by the company to the assessee in any form, the fundamental requirement of the provision that the company must part with its funds in favour of the shareholder was not satisfied. The account never reflected a debit balance at any point during the year, further confirming the absence of any loan or advance element.

 

This ruling reiterates that the deeming provision under section 2(22)(e) must be strictly construed and can be invoked only where a real benefit accrues to the shareholder from company funds. Transactions reflecting mere repayment or adjustment of shareholder deposits, without creation of a debit balance or fresh advance, should not be mechanically characterized as deemed dividend. Taxpayers maintaining running accounts with closely held companies should ensure proper documentation of credit balances to mitigate unwarranted exposure under this provision.